Thursday, November 20, 2008

The logical and analytical type. They are especialy attuned to difficult creative and intellectual challenges and always look for something more complex to dig into. They are great at finding subtle connections between things and imagine far-reaching implications.

They enjoy working with complex things using a lot of concepts and imaginative models of reality. Since they are not very good at seeing and understanding the needs of other people, they might come across as arrogant, impatient and insensitive to people that need some time to understand what they are talking about.

Wednesday, November 19, 2008

Concerning economist Willem Buiter's penchant for writing winding essays for blog posts, the man with the slightly odd shaped head (surely it holds a supercomputer) says the following to his readers:

'To all those readers of this blog who have requested shorter, snappier, less technical and abstruse postings, the following. I write this blog for me, not for my readers. Writing things down is the only way for me to communicate effectively with myself about complex issues. By doing this writing in the form of a blog, I gain the option of taking on board the comments and criticism of those who read my scribblings and feel compelled to respond to it. I gain this benefit at the cost of having to plough through a lot of stuff that makes little or no sense, in order to uncover the few pearls hidden among the swine.

... So no, my blogs will not get shorter, snappier, less demanding, less abstruse, complicated and confusing. My blog postings are and will be excessively lengthy, long-winded, demanding, abstruse, complicated and confusing where the problems are complicated and confusing. I make no concessions to my readers. Why should I? The readers I lose or miss as a result of writing the way I do are the readers I don’t want in the first place. They can always go to the National Enquirer, Bild or the News of the World.

PS - Some people say I’m arrogant. No idea where they get that notion.'

Tuesday, November 18, 2008

From the FT: 'US residential mortgage securities fell in value last week after Hank Paulson, Treasury secretary, said that the federal government had decided against buying toxic assets as part of its $700bn Tarp scheme. John Paulson (not related to the Treasury secretary), has told investors he started buying troubled MBS at the end of last week, hoping to capitalise on price falls that followed the Treasury announcement. Paulson, who has $36bn under management, was scheduled to hold a dinner at New York’s Metropolitan Club on Monday night to brief his investors on his plans.'

Saturday, November 15, 2008

We know stocks and junk bonds are trading extremely cheap right now. If we put the little matter of valuation measures aside (eg: P/E ratios, default probabilities etc), the simple fact that there is a whopping amount of forced selling taking place in the market (redemptions, deleveraging etc) surely suggests that it is a good time to start buying.*

Indeed, if I had the cash I would establish a large long position in corporate bonds and stocks and go away from the markets for a long, long time. If you have a 5-10 year trade almost everything is noise that can be ignored. You can stop reading any newspapers, especially the FT (sorry), block Bloomberg and CNBC, and spend more time gardening or going for pleasant walks, or writing that book you always wanted to write. To be different, let's call it the 'George Orwell strategy' after the fact that as World War II was heating up, Orwell's diaries inform us that was blissfully unaware. He was staying in Morocco at the time, his main concern beings whether his goat was yielding sufficient milk, and whether he was getting his daily egg from his hens.

---

* I'm' thinking as I type here, so it's going to be a bit of a ramble, but here goes:

An efficient market prices in all available information, with securities discounting the best guess about a company's prospects, the outlook for the economy, government policy etc. But what happens when one of the most important drivers of price relates not to the features of what it is that is being bought and sold, but to the actual buyers and sellers? In a stable environment, I imagine one or two forced sales would push prices down for a short period before other buyers would step in, buy up the bargains and push prices back up again. But what we are seeing is market dislocating levels of forced redemptions and deleveraging which cascade upon each other. These forces don't really alter the outlook for the PV of the future earning stream from a stock or a bond, but when funds are selling stocks they don't want to sell at prices they think are too low, you can pretty sure the discounting mechanism is broken.

Tuesday, November 11, 2008

"... the result of any single decision doesn’t necessarily tell us whether it was a good decision or not. In a probabilistic world, some smart gambles are going to fail, and some dumb ones are going to succeed. So post hoc analysis will often mislead us. You see this all the time in sports, where broadcasters are fond of proclaiming the wisdom or foolishness of a manager’s choice based entirely on whether or not it worked, rather than on the basis of whether or not it was the smart play according to the percentages. What we want policymakers to do is to make those decisions that maximize the chance of a good outcome while minimizing the chances of bad ones."

Sunday, November 09, 2008

Saturday, November 08, 2008

This is the first time I've come across the word 'sunset' used in this context:

"As some of you might know, AOL has recently decided to sunset its AOL Journals service."

I guess this usage follows on from the metaphor 'the sun has set on...' and is simply a softer, sugar-coated way of saying 'shut down', 'closed', or 'scrapped'. I wonder, will it form part of the credit crunch, corporate lingo, e.g. 'International Widgets will be sunsetting a third of it's product lines due to a change in the economic climate'.

Friday, November 07, 2008

JCVD is hitting the screens in the US this weekend. Here are the best bits from an interview Van Damme gave to NY Magazine. Genius:

I don't have a bad relationship. I'm 48 years old. I think life is too short for that. To me, life is... you open the shutters, you see the dogs outside, you look left, you look right, in, what, a second and a half? And that's a life.

It allowed you to be more vulnerable onscreen?It's not that. It was that the story becomes you. And then suddenly you don't follow the script anymore, the script is following you. If you're that good as an actor, the script is behind you, it's over. You're living the film.

Was there a point where the movie was cutting too close to real life? Or were you encouraging the directors to take more from reality?I saw myself on the screen — I was disturbed. I was not like, "Wow, I made a great movie, some great action." No, no, no — I was disturbed for a couple of days. The truth is like, why did I open myself so much? I opened the fruit, I peeled the skin, I cut the pulp. I put the pit, and I cut the pit, and I show inside the pit to the audience. I didn't just cut the pulp, you know what I'm saying?

... Can you tell me about the movie you're directing, Full Love?Oh, the movie, it could be great, but I don't know if it's good for my career. It's a tough movie where I like to tell the truth from the movie point of view, where I take the audience into a story. It makes sense and no sense at all, but at the end they'll understand why it makes sense. And between the ending and the movie, something will happen… Something will happen.

Thursday, November 06, 2008

Politics is and always will be a filthy business and I feel dirty just writing about it, so I'll share a few more bits on the US elections in this post and then that will be all for a while.

- The Boston Globe's 'Big Picture' site has a fantastic collection of high quality photos of Obama. It would have been nice to see a McCain collection as well, but I guess it's all about the victor right now.

McCain may have suffered a mighty and somewhat inevitable defeat but he ended on a very noble note. You can see his final speech on Youtube or read it on his web-site. Here's a snippet:

'Senator Obama and I have had and argued our differences, and he has prevailed. No doubt many of those differences remain. These are difficult times for our country, and I pledge to him tonight to do all in my power to help him lead us through the many challenges we face.

I urge all Americans who supported me to join me in not just congratulating him, but offering our next president our good will and earnest effort to find ways to come together, to find the necessary compromises, to bridge our differences, and help restore our prosperity, defend our security in a dangerous world, and leave our children and grandchildren a stronger, better country than we inherited.'

It will be interesting to see who Obama appoints to his team, but for now many are just glad to see the back of the 'monsters', as Paul Krugman puts it:

'Last night wasn’t just a victory for tolerance; it wasn’t just a mandate for progressive change; it was also, I hope, the end of the monster years.

What I mean by that is that for the past 14 years America’s political life has been largely dominated by, well, monsters. Monsters like Tom DeLay, who suggested that the shootings at Columbine happened because schools teach students the theory of evolution. Monsters like Karl Rove, who declared that liberals wanted to offer “therapy and understanding” to terrorists. Monsters like Dick Cheney, who saw 9/11 as an opportunity to start torturing people.

And in our national discourse, we pretended that these monsters were reasonable, respectable people. To point out that the monsters were, in fact, monsters, was “shrill.”

Four years ago it seemed as if the monsters would dominate American politics for a long time to come. But for now, at least, they’ve been banished to the wilderness.'

- The earliest advertisement in England for the sale of tea appeared in 1658. It read:

'That Excellent, and by all Phyfitians approved, China Drink, called by the Chineans, Tcha, by other Nations Tay alias Tee, is fold at the Sultanefs-head, a Coffee-houfe in Sweetings Rents by the Royal Exchange, London.'

- The business records of Thomas Garway, the first London merchant to deal in tea, suggest tea was on sale prior to 1657. His papers explain that it was very expensive and that 'in respect of its former scarceness and dearness, it hath only been used as Regalia in high Treatements and Entertainments, and Presents made thereof to Princes and Grandees.'

- On the usage of the word 'tea' and 'chaa': 'Tea' or 'tee' is derived from the Amoy dialect word te and was adopted by the Dutch traders who had regular contact with Chinese merchants from Amoy; 'Chaa' was the Cantonese dialect word, used by Portuguese merchants trading out of Macau.

- Coffee arrived in England before tea, with the first coffee house opening in Oxford in 1650.

- Tea was initially extremely expensive: The household accounts of 1660 for Mary, Countess of Argyll show that 6 ounces of tea cost £10 16s 0d - more than £26 per pound. Looking at the 1658 bill for the Woburn Abbey country estate of the 5th Earl of Bedfordshire, the estate lawyer earned £20 a year and a footman between £2 and £6 a year.

- Coffee houses also sold loose leaf tea so customers could take it back for their womenfolk to enjoy at home. Women were not permitted to enter the coffeehouses, not that they would have wanted to (they were smelly, noisy, smoky, and crowded with men).

- When tea was consumed in grand houses, it was generally within a lady's closet or bedchamber and for a mainly female gathering. The tea itself and the delicate pieces of porcelain for brewing and drinking were displayed in the closet, and inventories for wealthy households during the seventeenth and eighteenth centuries list tea equipage not in kitchens or dining rooms but in these small private closets or boudoirs.

- Until the end of the seventeenth century is was rare to add milk to tea.

- On why we became a tea drinking nation: There are probably two principal reasons. First, the English East India Company had a monopoly on the tea trade. Granted remarkable powers by royal charter, the East India Company was a formidable force and the tea-favouring propaganda it produced helped create a dietetic revolution in a matter of years. Second, at the end of the eighteenth century, England and Holland were at war with France and they were practically forced out of the Mediterranean, making it difficult to acquire stocks of coffee from the Levant. Tea became the reliable alternative.

- Twining's shop in the Strand was one of the first into which ladies could step into to buy their tea.

- Tea eventually became the drink of the day. It filtered through all levels of society, and played a role in everybody's life. By the time Queen Victoria died in 1901, tea had truly become a drink of the masses. Each person was drinking approximately six pounds of tea every year, and by the 1920s 60 percent of all world tea exports were being absorbed by Britain.

- In the eighteenth and nineteenth century, tea was recognised as such an important part of everybody's life that employers were expected to calculate certain amount of their servant's wages to be paid in tea.

- When the East India monopoly was broken in 1834, fast Clipper ships raced each other to be the first to bring the new season's tea to the port of London. The Clipper races were highly competitive and eagerly watched, as the first arrivals fetched significantly more than subsequent ships. For about twenty years, the clipper races generated more advertising for tea than any advertising by individual companies.

- 1960 saw the introduction of the tea bag in Britain. The idea is thought to have come from America in 1908, when tea importer Thomas Sullivan sent samples of tea to his clients in little silk pouches. The clients, not knowing what they were supposed to do with the pouches, placed them directly into the teapot. It worked and they wanted more of the same. By the 1920s most North Americans were brewing their tea in bags.

Wednesday, November 05, 2008

I have reservations about future policy initiatives from the Democrat Party, but for now here are a few concrete positives to focus on:

- It wasn't so long ago that many people thought the odds of seeing a black American president were about as high as spotting the creature pictured to the right. In the words of President Obama, 'If there is anyone out there who still doubts that America is a place where all things are possible; who still wonders if the dream of our founders is alive in our time; who still questions the power of our democracy, tonight is your answer.'

- Hope, possibility and change: Yes, the old clichés, but in a time of crisis Obama's symbolism of renewal stands to exert a greater positive influence than would likely be the case in a more stable climate. My friend, who flew to America to join in and learn about Obama's campaign (for ulterior motives no doubt!) said 'No politician has got Americans this excited for decades, if ever.'

- The stereotype image of the average American is an unfair and unflattering one, and we may now be seeing a change in the global perception of the US. Witness the celebrations in Kenya, the positive media coverage in the UK, and positive comments flowing in from international leaders. Even before the elections, change was in the air. In the UK for example, C4 and the BBC aired several documentaries about the country's past and future, helping the public to see more clearly the rich history and culture of the United States.

Tuesday, November 04, 2008

Marginal Revolution's Alex Tabarrok voted for the first time ever and got a free coffee from Starbucks for his troubles. If I were a US citizen, I would have voted in these elections, and not just for the free coffee. His blogging partner in crime, Tyler Cowan, comments on voting with:

'Most of what you do is for expressive value anyway, so you shouldn't feel guilty about voting, if indeed you vote. The people who think they are being instrumentally rational by not voting are probably deceiving themselves more. They are actually engaged in an even less transparent form of expressive behavior (protest against the voting system) and yet cloaking that behavior under the guise of instrumental rationality. The best arguments against voting are simply if you either don't like voting or if you don't know which candidate is better.'

I disagree in general with Cowen's comment that '...both voting and not voting are motivated by the thought that you are better than other people'. The statement does suggest that Cowen at the very least, is having these thoughts of supremacy ... although in his case they are probably be justified.

Hollywood's top celebrities have been urging American citizens to get out and vote. Scroll the video forward one minute and ten seconds, and again to two minutes, to see Borat up to his usual tricks:

If the above video didn't put the fear in you, watch this:

Voting underpins the democratic system the world over but let's take some time out and ask 'how important is it, really?' It may come as a surprise, but many economists take the view that voting isn't very important at all, and that it may in fact be irrational from the perspective of the individual.

The simple premise for the argument against making your way to your local polling booth is that an individual vote carries almost no weight in the grander scheme of things, especially when weighed against the costs of voting (time, hassle, financial cost, etc). Steve Landsburg, author of the excellent 'Armchair Economist' (a book that was well ahead of the curve of popular economics books), comments that:

... my chance of casting the deciding vote in New York is about one in 10 to the 200,708th power. I have a better chance of winning the Powerball jackpot 7,400 times in a row than of affecting the election's outcome. Which makes it pretty hard to see why I should vote.

The traditional reply begins with the phrase "But if everyone thought like that ... ." To which the correct rejoinder is: So what? Everyone doesn't think like that. They continue to vote by the millions and tens of millions.

The idea of the irrelevant individual voter shocks a lot of people. Russ Roberts reports the following response when he explained this view in a seminar:

I mentioned that it's irrational to vote. Why people vote has long fascinated both economists and political scientists. The fascination is straightforward. Voting is costly, it takes time. The probability that your vote will influence the outcome of an election is basically zero or very close. So why vote?'

The journalists reacted to my claim with a mixture of outrage and laughter. They couldn't decide on whether I was a monster or simply a fool. I tried to explain the argument. No luck.

That said, Roberts does provide a counterpoint with Kant's 'categorical imperative', which basically says 'that you should act assuming that others will act the same way. And Kant is right. It's a very good moral principle that rules out all kinds of negative externalities.'

Leading public choice economist Gordon Tullock agrees with Landsberg and Roberts. The writers behind this cool interview with Tullock provide an excellent example using pizza (explanations involving pizza rarely fail). The idea is simply that when three people vote on which type of pizza to buy, it is very easy for the the third person (the marginal voter), to find themselves in a situation where they have the swinging vote. Their vote carries considerable power. However, if thousands of people are deciding on which pizza to eat then it becomes highly unlikely that any given individual's vote will affect the final outcome. It's simple: more votes = less power to each voter.

The video interview fades out with the writers presenting a kind of circular logic, commenting that if no one voted then the power of the individual voter becomes highly significant and it makes sense to vote, but then as more and more people vote, the more insignificant your vote becomes, and the less sense it makes to vote, but then ... and on and on.

The Freakonomics blog highlights the insignificance of the marginal voter with the following statistics:

For all the attention paid in the media to close elections, it turns out that they are exceedingly rare. The median margin of victory in the Congressional elections was 22 percent; in the state-legislature elections, it was 25 percent. Even in the closest elections, it is almost never the case that a single vote is pivotal. Of the more than 40,000 elections for state legislator that Mulligan and Hunter analyzed, comprising nearly 1 billion votes, only 7 elections were decided by a single vote, with 2 others tied.

So why do so many people vote?

- The Freakonomics piece suggests that social pressure plays a powerful role in getting people into the voting booths. They cite the case of Switzerland, where the introduction of a postal voting system was expected to increase voter participation but it had the opposite effect and voter turnout fell. Anonymity meant that people no longer had to turn up to vote just to save face.

- Economists Andrew Gelman and Noah Kaplan make the interesting suggestion that people may be thinking beyond themselves when they go to vote, in which case they are weighing the marginal cost of voting not against the perceived marginal benefit to themselves, but to all of society. Thinking in this way would change the size of the pay-off by no small measure:

If your vote is decisive, it will make a difference for tens of millions of people. If you think your preferred candidate could bring the equivalent of a $100 improvement in the quality of life to the average person in your country—not an implausible hope, given the size of national budgets and the impact of decisions in foreign policy, health, the environment, and other areas—you’re now buying a billion-dollar lottery ticket. With this payoff, a 1 in 10 million chance of being decisive isn't bad odds.

And many people do see it that way. Surveys show that voters choose based on who they think will do better for their country as a whole, rather than their personal betterment. Indeed, when it comes to voting, it is irrational to be selfish. The probability of your vote being decisive is roughly inversely proportional to the size of the electorate (see Gelman, King, and Boscardin, 1988, Gelman, Katz, and Bafumi, 2004, and Mulligan and Hunter, 2002, for details and empirical evidence), and your personal benefit remains flat, but the “social benefit”—the total gain for the country that you would anticipate, if your candidate wins—is proportional to the population ...

They also see through the apparent conundrum that the Tullock interview ends on, pointing to a natural equilibrium in voting turnout:

... if turnout declines, then the probability of a tied election increases, which in turn implies that, on the margin, it then becomes rational for some people to vote. The feedback with voter turnout is why voting is not a simple free-rider or prisoner’s dilemma problem: the more people who free ride (by not voting), the higher the expected benefit to you of voting, and so extremely low turnout is not an equilibrium.

Have Gelman and Noah Kaplan cracked it? The believe so:

We have rescued rational choice theory from the voter turnout paradox, but at a price, by formally decoupling rationality from self-interest (except in the uninteresting tautological sense that anything you do must be in your self-interest because otherwise you wouldn’t be doing it).

- The Stumbling and Mumbling blog also reminds us that economics tends to over simplify humans, usually only thinking in terms of 'instrumental rationality' and may be overlooking symbolic rationality:

I suspect voting is (traditionally) symbolically rational. People vote not out of cost-benefit considerations but to symbolize who they are. My grandad voted Labour all his life simply because that was what working-class people like him did. He no more thought of voting Tory than he thought of leaving the house without his hat - it was just against nature to do so.

... it became an almost sacramental act. In today's polling places, voices are hushed and movements slow, and we move toward the altar of the booth until we are finally alone with our selections. But though our choices may be private, election day itself is one of the few occasions many of us have to gather with our community. On the others -- sporting events, concerts, watching the fireworks on the Fourth of July -- we come together as spectators, observing the action but not participating in it. And unfortunately, spectatorship characterizes much of our contemporary engagement with the world. But on election day, we gather to act. We look around at our neighbors and know that at that very instant, millions of other Americans are doing the same thing. At that moment we are something extraordinary: we are citizens.

If you have children, take them to the polls with you. Remind them that for most of human history, people had no say in who would lead them, that violence and fear determined who controlled the institutions of power. Tell them that even in our own country, founded on the most noble of democratic principles, people have had to labor and protest and fight and even die to secure this right for themselves and for others. Tell them that there are many things you can do to exercise your citizenship, but this is one thing you must do. Tell them that election day is when you act not for yourself but for your community and your country.

As someone who has never voted for a politician or political party in my life, but who would vote and perhaps even fight for 'the right to vote', I have to finish with a few more reasons for not voting:

I suffer from no romantic delusions about politics or about voting. So I winced when I read in the lead editorial in today's Washington Post that CBS newsman Bob Schieffer recently told his viewers "Go vote. It will make you feel big and strong."

I am perfectly capable of saving for my own retirement, of choosing whether or not to patronize a restaurant that permits smoking, of choosing which elements to ingest into my own body, of providing for the education of my son, of deciding what degree of driver and passenger safety I want in my automobile -- indeed, of doing a great number of things that government today presumes me to be too gullible or too irresponsible or too childish to do. And what is true of me, an ordinary adult, is true of nearly every other adult.

It makes them, just on the margin, a bit more fearful that they are ruling us without our consent. This is all to the good. The government should fear the people. Not voting is a good beginning toward instilling that fear.

- Comedian George Carlin comes down hard on the general public who vote in politicians only to moan and complain about them when they screw things up. By staying at home, Carlin says he has the right to complain as loud as he wants about the inevitable mess that he had no hand in creating. A word of warning: Carlin is known for being a bit of a potty-mouth. When I listen to Carlin, I am reminded of these words from the late Bernie Mac, 'It's jokes, it's fun...but it's also the truth.'

Sunday, November 02, 2008

This is a splendid project by 'The Orwell Prize' to publish the celebrated writer's diary entries in blog form, seventy years later, to the day. It is a wonderful technique allows the reader to go back as if in a time-machine and then progress forward in a kind of pseudo real time.

Being a diary of day-to-day events, don't expect too much. Right now, Orwell is detailing his time in Morocco with a particular fascination for all things animal and agricultural, with a particular obsession for egg production. One recent diary entry simply reads, 'Fine, not very hot. One egg.'

The diaries started in August 2008 (1938) and will end in 2012 (1942). Right now, Orwell is in Morocco. Later, he will return to the UK and give his views on the Second World War.

I started reading a nineteen page article titled 'To Philosophize is to Learn How to Die?' and gave up half way through the first paragraph. Feel free to try your luck:

Philosophical thinking, as it is thinking of existence, is essentially finite thinking. This is to say that as thinking of existence, philosophical thinking is essentially also thinking of finitude. This ‘also’ is not the accidental relationship between existence and finitude. Rather, to think existence in its finitude, insofar as existence is finite, is to think existence in its existentiality. Philosophy that gives itself the task of thinking the relationship between existence and finitude, must in the same gesture, be concerned with its own finitude: to philosophize is not only to think the finitude of existence, but the very finitude of thinking that thinks finite existence. To philosophize is not only to philosophize the finitude of existence as such, but also in so far as philosophising itself is a task which is essentially in itself finite. To assume as the task of thinking the finitude of existence is to think the very finitude of philosophical thinking: this is the profound relationship that exists between existence and philosophy, which is that philosophizing existence and an existential philosophy are essentially finite.

Saturday, November 01, 2008

'As long as banks remain mere collections of individuals, the situation will continue to be like herding cats. Hosing them with water now and then will chase them off and make them wary about returning for a while. But one day they’ll be back to feed on our greed and to make a disgusting mess in our backyard.'